Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the
Securities Exchange Act of 1934
For the transition period from ______ to _____
Commission File Number 1-12368
THE LEATHER FACTORY, INC.
(Exact name of registrant as specified in its charter)
Delaware 75-2543540
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3847 East Loop 820 South, Ft. Worth, Texas 76119
(Address of principal executive offices) (Zip code)
(817) 496-4414
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to by filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Class Shares outstanding as of November 12, 1998
- ---------------------------------------- ------------------------------------------
Common Stock, par value $.0024 per share 9,853,161
</TABLE>
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<CAPTION>
THE LEATHER FACTORY, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
-----------------
PAGE NO.
--------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
September 30, 1998 and December 31, 1997......................................... 3
Consolidated Statements of Income (Loss)
Three and nine months ended September 30, 1998 and 1997.......................... 4
Consolidated Statements of Cash Flows
Nine months ended September 30, 1998 and 1997.................................... 5
Consolidated Statements of Stockholders' Equity and Comprehensive Income (Loss)
Nine months ended September 30, 1998 and 1997.................................... 6
Notes to Consolidated Financial Statements........................................ 7-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................... 9-13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................... 14
Item 5. Other Matters............................................................... 14
Item 6. Exhibits and Reports on Form 8-K............................................ 15
SIGNATURES............................................................................ 15
EXHIBIT INDEX......................................................................... 16-17
</TABLE>
2
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<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1998 1997
------------ ------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 213,642 $ 70,496
Cash restricted for payment on revolving credit facility 283,652 319,133
Accounts receivable-trade, net of allowance for
doubtful accounts of $44,000 and $28,000
in 1998 and 1997, respectively 2,051,822 1,865,276
Inventory 7,254,700 7,279,702
Prepaid income taxes 265,475 285,970
Deferred income taxes 115,200 109,411
Other current assets 397,440 385,199
------------ ------------
Total current assets 10,581,931 10,315,187
------------ ------------
PROPERTY AND EQUIPMENT, at cost 2,646,582 2,534,839
Less-accumulated depreciation and amortization (1,738,971) (1,505,098)
------------ ------------
Property and equipment, net 907,611 1,029,741
GOODWILL and other, net of accumulated amortization of
$1,043,000 and $878,000 in 1998 and 1997, respectively 5,406,559 5,679,621
------------ ------------
$ 16,896,101 $ 17,024,549
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 1,243,237 $ 942,046
Accrued expenses and other liabilities 464,923 559,776
Notes payable and current maturities of
long-term debt 4,698,724 4,650,742
------------ ------------
Total current liabilities 6,406,884 6,152,564
------------ ------------
DEFERRED INCOME TAXES 110,767 136,611
NOTES PAYABLE AND LONG-TERM DEBT,
net of current maturities 2,301,994 2,602,728
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $0.10 par value; 20,000,000
shares authorized, none issued or outstanding -- --
Common stock, $0.0024 par value; 25,000,000 shares
authorized, 9,853,161 shares issued in 1998 and 1997 23,648 23,648
Paid-in capital 4,118,496 4,119,915
Less: Notes receivable - secured by common stock (231,225) (257,617)
Unearned shares held by ESOP, 45,188 and 54,262
shares in 1998 and 1997, respectively (228,056) (273,851)
Retained earnings 4,418,411 4,534,569
Accumulated other comprehensive loss (24,818) (14,018)
------------ ------------
Total stockholders' equity 8,076,456 8,132,646
------------ ------------
$ 16,896,101 $ 17,024,549
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
THREE MONTHS NINE MONTHS
1998 1997 1998 1997
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
NET SALES $ 5,628,895 $ 6,353,582 $ 16,811,190 $ 19,340,466
COST OF SALES 3,146,647 3,659,591 9,487,408 11,343,380
------------ ------------ ------------ --------------
Gross Profit 2,482,248 2,693,991 7,323,782 7,997,086
OPERATING EXPENSES 2,186,063 2,293,706 6,678,596 6,995,461
------------ ------------ ------------ --------------
INCOME FROM OPERATIONS 296,185 400,285 645,186 1,001,625
OTHER (INCOME) EXPENSE:
Interest expense 250,841 214,871 751,188 633,638
Other, net 3,580 (17,649) (20,221) (14,361)
------------ ------------ ------------ --------------
Total other (income) expense 254,421 197,222 730,967 619,277
------------ ------------ ------------ --------------
INCOME (LOSS) BEFORE INCOME TAXES 41,764 203,063 (85,781) 382,348
PROVISION FOR INCOME TAXES 35,850 110,624 30,377 238,236
------------ ------------ ------------ --------------
NET INCOME (LOSS) 5,914 92,439 (116,158) 144,112
============ ============ ============ ==============
EARNINGS (LOSS) PER COMMON SHARE $ -- $ 0.01 $ (0.01) $ 0.01
============ ============ ============ ==============
EARNINGS (LOSS) PER COMMON SHARE--Assuming Dilution $ -- $ 0.01 $ (0.01) $ 0.01
============ ============ ============ ==============
DIVIDENDS PAID PER COMMON SHARE $ -- $ -- $ -- $ --
============ ============ ============ ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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<TABLE>
<CAPTION>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
1998 1997
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (116,158) $ 144,112
Adjustments to reconcile net income to net
cash provided by (used in) operating activities-
Depreciation & amortization 399,104 390,659
(Gain) loss on sales of assets (9,118) (16,071)
Deferred financing costs 165,854 --
Deferred income taxes (31,633) (18,776)
Other 4,472 (678)
Net changes in operating assets and liabilities:
Accounts receivable-trade, net (186,546) (344,456)
Inventory 25,002 268,785
Income taxes 20,495 254,795
Other current assets (12,241) 57,635
Accounts payable 301,191 302,438
Accrued expenses and other liabilities (94,853) (19,142)
------------ ------------
Total adjustments 581,727 875,189
------------ ------------
Net cash provided by operating activities 465,569 1,019,301
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (112,583) (200,976)
Proceeds from sales of assets 10,000 26,841
Other intangible costs (1,728) (32,061)
------------ ------------
Net cash used in investing activities (104,311) (206,196)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable and long-term debt 16,935,061 302,957
Payments on notes payable and long-term debt (17,009,311) (1,118,140)
Decrease in cash restricted for payment on revolving credit facility 35,481 --
Payments received on notes secured by common stock 26,392 --
Deferred financing costs (205,735) --
------------ ------------
Net cash used in financing activities (218,112) (815,183)
------------ ------------
NET INCREASE (DECREASE) IN CASH 143,146 (2,078)
CASH, beginning of period 70,496 488,192
------------ ------------
CASH, end of period $ 213,642 $ 486,114
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the period $ 594,390 $ 562,325
Income taxes paid during the period, net of refunds 34,895 2,217
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
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<TABLE>
THE LEATHER FACTORY, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Common Stock Notes
------------------ Receivable
Number Par Paid-in - Secured by Unearned Retained
of Shares Value Capital Common Stock ESOP Shares Earnings
--------- -------- ---------- ------------ ----------- ----------
<S> <C> <C>
BALANCE, December 31, 1996 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,464,277
Net Income - - - - - 144,112
Foreign currency
translation adjustment - - - - - -
--------- -------- ---------- ------------ ----------- ----------
BALANCE,September 30, 1997 9,853,161 $ 23,648 $4,130,796 $ (269,305) $ (326,184) $4,608,389
========= ======== ========== ============ =========== ==========
BALANCE, December 31, 1997 9,853,161 $ 23,648 $4,119,915 $ (257,617) $ (273,851) $4,534,569
Payments received on notes
secured by common stock - - - 26,392 - -
Allocation of suspended
ESOP shares committed to
be released - - (41,419) - 45,795 -
Warrants issued to acquire
200,000 shares of common stock - - 40,000 - - -
Net loss - - - - - (116,158)
Foreign currency
translation adjustment,
net of tax of ($6,620) - - - - - -
--------- -------- ---------- ------------ ----------- ----------
BALANCE, September 30, 1998 9,853,161 $ 23,648 $4,118,496 $ (231,225) $ (228,056) $4,418,411
========= ======== ========== ============ =========== ==========
Accumulated
Other Total
Comprehensive Stockholder's Comprehensive
Loss Equity Income (Loss)
------------- ------------- -------------
BALANCE, December 31, 1996 $ (295) $ 8,022,937
Net Income - 144,112 $ 144,112
Foreign currency
translation adjustment (2,314) (2,314) (2,314)
------------- -------------
BALANCE, September 30, 1997 $ (2,609) $ 8,164,735
============= =============
------------
Comprehensive income (loss)for the nine months ended September 30, 1997 $ 141,798
============
BALANCE, December 31, 1997 $ (14,018) $ 8,132,646
Payments received on notes
secured by common stock - 26,392
Allocation of suspended
ESOP shares committed to
be released - 4,376
Warrants issued to acquire
200,000 shares of common stock - 40,000
Net loss - (116,158) $ (116,158)
Foreign currency
translation adjustment,
net of tax of ($6,620) (10,800) (10,800) (10,800)
------------- -------------
BALANCE, September 30, 1998 $ (24,818) $ 8,076,456
============= =============
------------
Comprehensive income (loss)for the nine months ended September 30, 1998 $ (126,958)
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
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THE LEATHER FACTORY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
In the opinion of the Company, the accompanying consolidated financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly its financial position as of September
30, 1998 and December 31, 1997, and the results of operations and cash flows for
the three and nine month periods ended September 30, 1998 and 1997. The results
of operations for the three and nine month periods are not necessarily
indicative of the results to be expected for the full fiscal year. The
consolidated financial statements should be read in conjunction with the
financial statements and disclosures contained in the Company's 1997 Annual
Report on Form 10-K ("Annual Report").
<TABLE>
<CAPTION>
2. INVENTORY
The components of inventory consist of the following:
September 30, December 31,
1998 1997
--------------- ---------------
<S> <C> <C>
Finished goods held for sale $ 6,051,058 $ 5,833,002
Raw materials and work in process 1,203,642 1,446,700
=============== ===============
$ 7,254,700 $ 7,279,702
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
3. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1998 1997 1998 1997
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for basic and
diluted earnings per share:
Net income (loss) $ 5,914 $ 92,439 $ (116,158) $ 144,112
========== =========== ========== ===========
Denominator for basic and
diluted earnings per share:
Weighted-average shares outstanding 9,805,385 9,788,530 9,802,349 9,788,530
Basic earnings per share $ - $ 0.01 $ (0.01) $ 0.01
========== =========== ========== ===========
Diluted earnings per share $ - $ 0.01 $ (0.01) $ 0.01
========== =========== ========== ===========
</TABLE>
Unexercised employee and director stock options to purchase 543,000 and 566,000
shares of common stock as of September 30, 1998 and 1997, respectively, were not
included in the computations of diluted EPS because the options' exercise prices
were greater than or equal to the average market price of the common stock
during the respective periods.
Warrants (see note 9 to consolidated financial statements in the Annual Report
and Item 5 under Part II of this Report on Form 10-Q) to acquire 300,000 shares
of common stock were not included in the computations of diluted EPS because the
warrants' exercise prices were greater than the average market price of the
common stock during the quarter and nine months ended September 30, 1998.
The 13% convertible debt (see note 3 to consolidated financial statements in the
Annual Report) was not included in the computation of diluted earnings per share
because the interest cost (net of tax) per assumed converted share was more than
basic earnings per share and, therefore, the effect would be antidilutive.
7
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<TABLE>
<CAPTION>
4. COMPREHENSIVE INCOME
The following table sets forth the computation of comprehensive income:
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ------------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income (loss) $ 5,914 $ 92,439 $ (116,158) $ 144,112
Other comprehensive income:
Translation adjustment, net of tax (6,723) 909 (10,800) (2,314)
----------- ----------- ----------- -----------
Comprehensive income $ (809) $ 93,348 $ (126,958) $ 141,798
=========== =========== =========== ===========
</TABLE>
5. STOCKHOLDERS' EQUITY
Warrants
In connection with the consulting agreement discussed in Item 5 of Part
II of this Form 10-Q, the Company issued warrants to acquire up to 200,000
shares of Common Stock at $0.4375 per share. The warrants may be exercised at
anytime until expiration on August 3, 2003. The fair value for these warrants
was estimated at the date of grant using the Black Scholes option pricing model
with the following weighted-average assumptions: risk-free interest rate of 5%;
dividend yield of 0%; volatility factor of .645; and an expected life of 3
years.
6. IMPACT OF NEW ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information. SFAS
131 establishes annual and interim reporting requirements for an enterprise's
operating segments and related disclosures about its products and services,
geographical areas in which it operates and major customers. Statement 131 is
effective for fiscal years beginning after December 15, 1997, and therefore, the
Company will adopt the new requirements retroactively in 1998 if applicable. The
Company operates in one broad industry and historically has not identified
separate segments of its business. Management has not completed its review of
Statement 131, but does not anticipate that the adoption of this statement will
have a significant effect on the Company's disclosures.
8
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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
General
The Leather Factory, Inc. (the "Company") is the leading one-stop
source for leather and leathercraft supplies in America. Unique service to a
vast array of customers sets the Company apart in the leathercraft industry.
Whether for the saddlemaker, beltmaker, hobbyist, craft store, western store,
shoe repair shop, manufacturer, hospital, prison or other institution where
leather is used, sold or enjoyed, The Leather Factory is the number one choice.
The Company operates twenty-two Leather Factory sales/distribution
units in the United States and Canada. In addition, through its subsidiary,
Roberts, Cushman & Company, Inc., the Company manufactures and distributes hat
trims in braids, leather, and woven fabrics; and small finished leather goods,
such as cigar cases, picture frames, wallets and other accessories.
Results of Operations
Income Statement Comparison
The following table sets forth, for the interim periods indicated,
certain items from the Company's Consolidated Statements of Income (Loss)
expressed as a percentage of net sales:
<TABLE>
Quarterly Period Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
<S> <C> <C> <C> <C>
1998 1997 1998 1997
-------- -------- -------- --------
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 55.9 57.6 56.4 58.6
-------- -------- -------- --------
Gross profit 44.1 42.4 43.6 41.4
Operating expenses 38.9 36.1 39.7 36.2
-------- -------- -------- --------
Income from operations 5.2 6.3 3.9 5.2
Interest expense and other, net 4.5 3.1 4.4 3.2
-------- -------- -------- --------
Income (loss) before income taxes 0.7 3.2 (0.5) 2.0
(Benefit) provision for income taxes 0.6 1.7 (0.2) 1.2
-------- -------- -------- --------
Net income (loss) 0.1% 1.5% (0.7)% 0.8%
======== ======== ======== ========
</TABLE>
Revenues
For the quarter and nine months ended September 30, 1998, net sales
decreased 11.4% and 13.1%, respectively, compared to the same interim periods in
1997. Of these declines, 7.3% and 4.8%, respectively, resulted from strategic
decisions to eliminate low margin items from the Company's product lines. The
remaining declines of 4.1% for the quarter and 8.3% for the nine months resulted
from reduced sales to the craft and western apparel markets and lower export
sales. These declines were net of gains in the Company's core institutional
business representing 3.7% and 0.3% of last year's third quarter and nine month
sales, respectively.
9
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Costs, Gross Profit, and Expenses
Cost of sales as a percentage of revenue was 55.9% for the third
quarter of 1998 as compared to 57.6% for the same quarter in 1997. Cost of sales
percentages for the nine months ended September 30, 1998 and 1997, were 56.4%
and 58.6%, respectively. These 1.7% and 2.2% reductions for the respective three
and nine month periods resulted from improved product mix and the Company's
strategic efforts to selectively increase prices and eliminate low margin items
from its product lines.
Lower relative cost of sales percentages meant that gross profit as a
percentage of sales improved to 44.1% and 43.6% for the respective three and
nine month periods ended September 30, 1998, as compared to only 42.4% and 41.4%
for the same periods in 1997. The Company's strategy for combating declining
sales includes emphasis on improved gross margins so that the decline in gross
profit is proportionately less than the revenue decline. Accordingly, gross
profit dollars decreased $211,743 or only 7.9% and $673,304 or only 8.4% for the
quarterly and nine month periods ended September 30, 1998, compared to the
respective 1997 periods.
Operating expenses decreased $107,643 or 4.7% to $2,186,063 during the
third quarter of 1998 from $2,293,706 during the quarter ended September 30,
1997. The decrease between the two quarters resulted primarily from lower
advertising, freight, payroll and insurance costs, and decreased bad debt
write-offs, net of higher facility and other costs. For the nine months ended
September 30, 1998, operating expenses declined $316,865 or 4.5% compared to the
nine months ended September 30, 1997. The decrease between the two nine month
periods resulted primarily from lower advertising, freight, payroll and
insurance costs, decreased bad-debt write-offs and professional fees, net of
higher facility and other costs.
Other (Income) Expense
Other expenses increased $57,199 or 29.0% to $254,421 for the third
quarter of 1998 from $197,222 during the same quarter in 1997. The increase was
primarily due to higher interest expense resulting from the amortization of
deferred financing costs and non-recurring income of approximately $20,000 in
1997's third quarter from gain on disposal of fixed assets and discounts taken.
Other expenses increased $111,690 or 18.0% to $730,967 for the first nine months
of 1998 from $619,277 during the same period in 1997. The increase was primarily
due to higher interest expense resulting from the amortization of deferred
financing costs.
Net Income (Loss)
The Company reported net income of $5,914 for the quarter and a net
loss of $116,158 for the nine months ended September 30, 1998, as compared to
net income of $92,439 and $144,112, respectively, in the corresponding periods
during 1997. The decreased operating results for such periods resulted from the
factors noted above regarding sales, gross profit, operating and other expenses.
Outlook
The statements contained in this Outlook section are based upon
management's current expectations and contain forward-looking statements that
involve numerous risks and uncertainties. Actual results may differ materially.
Management believes opportunities exist for the Company to use its size
and competitive advantages to increase market share in the core leathercraft
business composed of sales to institutional or saddle and tack customers. The
Company is also aggressively pursuing the leather accessories and travelware
10
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markets. Recent revenue trend lines show good growth in these areas over the
last twelve months. Our efforts are working and the Company plans continued
development of products and programs geared to these customer groups. These
plans include opening two to four new Leather Factory distribution units each
year over the next five years. The grand opening in Portland, Oregon has been
delayed but should occur within the next few months.
Additionally, the Company believes that conditions in the retail craft
market are improving after three years of declines. While revenues are down over
twenty-four months, the trend line has an upward slope in the last twelve
months. The Company plans to increase development of new products and programs
geared to the craft market. Our national sales team is working diligently with
retailers to replace and refresh older programs in their stores.
Negative revenue trends in the western apparel markets show no
improvement in historical numbers. However, many recent consumer fashion and
celebrity magazines indicate that western apparel and accessories are once again
becoming popular. Whether this proves to be only a fad or the bottom in the
protracted western market decline remains to be seen.
Weak economic conditions worldwide are now beginning to effect the U.S.
economy as reflected in recent announcements of reduction in the job growth
rate, reduced interest rates and increased unemployment figures. Recession and
weak economic conditions in general have been growth periods for the
leathercraft industry. During the last recession (late 80's and early part of
this decade,) the Company's revenues grew at an average annual rate in excess of
twenty-five percent. The average consumer views leather as a more durable goods
than other materials and large areas of unemployment generally produce a new
source of resellers making leather items to generate extra income.
Management expects overall revenue declines over the next quarter
primarily due to the strategic decision to eliminate certain low margin items
from the Company's products lines. The Company anticipates that gains in
institutional and craft markets will offset a majority of these declines at a
higher margin. Declines from these merchandising decisions will ease over the
next six months and the Company anticipates achieving overall revenue growth by
the second quarter of 1999. The Company believes this growth can be achieved at
current gross profit margins and without significant increases in operating
costs. This should in turn return the Company to sustained earnings growth.
Capital Resources and Liquidity
The primary sources of liquidity and capital resources during the first
nine months of 1998 were net funds provided by operating activities in the
amount of $465,569 and borrowings on the Company's revolving credit facility
with FINOVA Capital Corporation ("FINOVA"). The Company's unrestricted cash
increased to $213,642 at September 30, 1998 from $70,496 at December 31, 1997.
This increase was primarily the result of cash generated by operating
activities, a decrease in restricted cash and proceeds from assets sales and
notes receivable offset by capital expenditures, payment of deferred financing
costs and net repayments of debt.
Non-cash expenses for depreciation, amortization and deferred financing
cost continue to give rise to significant operating cash flows despite the loss
reported for the nine months ended September 30, 1998. Net non-cash items
included in the nine month results provided cash flows of $528,679. Other
significant operating cash flow resulted from an increase of $301,191 payable to
vendors at September 30, 1998 compared to the balance at December 31, 1997.
These operating cash flows were partially used to fund an increase in
accounts receivable of $186,546 at September 30, 1998, compared to the balance
11
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at December 31, 1997. Other significant uses of operating cash flows were to
reduce accrued expenses and other liabilities to $464,923 at September 30, 1998
compared to $559,776 at December 31, 1997.
The revolving credit facility with FINOVA is based upon the level of
the Company's accounts receivable and inventory. At September 30, 1998 and
December 31, 1997, the Company had additional availability on the revolving
credit facility of approximately $530,000 and $377,000, respectively. As the
Company's sales and operations expand requiring larger investments in accounts
receivable and inventory, the Company could have almost $3,000,000 in additional
funds available under the revolving credit facility.
The largest non-operating uses of cash beyond debt payments in the
first nine months of 1998 were for the payment of deferred financing costs
related to the FINOVA transaction closed on November 21, 1997 and capital
expenditures. The deferred financing cost paid during the nine month period
totaled $205,735, leaving a balance due of only $25,666. The remaining
obligation will be paid in October and November of 1998, after which time,
approximately $20,000 of monthly cash flow will be available for other uses.
Capital expenditures totaled $112,583 and principally relate to new computer
systems, warehouse fixtures and other equipment additions or replacements at
various sales/distribution units, and leasehold improvements and equipment cost
associated with the re-location of the Company's New York manufacturing
facility.
The Company believes that the current sources of liquidity and capital
resources will be sufficient to fund current operations, meet debt obligations
and fund the opening of new sales/distribution units. In 1998 and 1999, funding
for the opening of new units is expected to be provided by operating leases,
cash flows from operating activities, and the Company's Revolving Credit Loan
with FINOVA. In addition, the Company anticipates funding for completion of the
computer installation in the remaining locations to be provided by capital
leases.
In the fourth quarter, the Company will begin talks with its senior and
subordinated lenders regarding refinancing of the obligations which mature in
the fourth quarter of 1999. The Company's senior lenders have indicated they
currently expect to extend their obligations under current terms and conditions
for up to three years or such shorter term of any subordinated obligations upon
successful extension or replacement of the current subordinated debenture.
Management believes the Company will be able to successfully replace or extend
the current subordinated debenture; however, failure to do so could have a
material adverse impact upon the Company.
Year 2000 Issue
The Year 2000 ("Y2K") problem arose because many computer programs use
only the last two digits to refer to a year. As a consequence, unless modified,
many computer systems will interpret "00" as 1900 rather than the year 2000.
This issue is believed to affect virtually all organizations and failure to
address the problem could result in system failures and the generation of
erroneous data. Each company's potential costs and uncertainties will depend on
a number of factors including but not limited to its software, hardware, the
nature of its industry, and the sophistication of its manufacturing and process
control systems.
The Company has developed a comprehensive Y2K readiness plan to ensure
its systems will be Y2K compliant prior to the year 2000. Pursuant to this plan,
the Company conducted preliminary reviews of its critical information technology
("IT") systems as well as its non-IT systems. The majority of systems that were
found to be defective in this review have been replaced or upgraded with the
exception of the Company's Point of Sale ("POS") software used for invoicing and
inventory maintenance in the Company's Texas locations.
The installation of the POS system in the Company's remaining nineteen
distribution units was delayed until after the conversion and testing of the Y2K
12
<PAGE>
compliant version of the software. The conversion in the Fort Worth location is
currently in process and all Texas locations should be on the Y2K compliant
version by the end of the year. Installation in the remaining locations is
currently scheduled to be completed by June 30, 1999.
The Company has appointed a Y2K committee composed of senior executives
and middle management. This committee is charged with testing systems for
potential Y2K problems missed in the preliminary review and remediation process
as well as assessment of potential risks from the Company's trading partners'
Y2K failures. This committee will report periodically to the Company's Board of
Directors and currently expects testing to be completed by June 30, 1999.
The Company has managed its Y2K compliance program using mostly
internal salaried staff. For this reason and the fact that much of the
replacement cost of non-compliant IT systems would have been incurred anyway, it
is difficult to quantify the actual remediation costs. It is estimated that
approximately $60,000 or 60% of the total expected remediation costs have been
incurred to date. These costs were funded by the Company's revolving credit loan
with FINOVA Capital Corporation as will the remaining cost most likely.
The Company believes because of the nature of its operations and the
steps taken as discussed above that the Y2K issue will not have a material
impact on the Company's results of operations, liquidity, or financial
condition. Actual results may differ from the forward-looking statements
contained in this discussion and there can be no guarantee that the failure of
certain systems will not have a material adverse effect on the Company.
In the unlikely event that unforeseen Y2K problems are not remedied
prior to a disruption in normal business operations, the Company would in most
instances be able to temporarily revert to manual processes that the Company
successfully used prior to automating many routine tasks.
Cautionary Statement
The disclosures under "-Results of Operations"; "-Outlook"; "-Capital
Resources and Liquidity"; "-Year 2000 Issue"; and in the Notes to Consolidated
Financial Statements as provided elsewhere herein contain forward-looking
statements and projections of management. There are certain important factors
which could cause results to differ materially than those anticipated by some of
the forward-looking statements. Some of the important factors which could cause
actual results to differ materially from those in the forward-looking statements
include, among other things: changes from anticipated levels of sales, whether
due to future national or regional economic and competitive conditions,
including, but not limited to, retail craft buying patterns, continued negative
trends in western retail markets, customer acceptance or not of existing and new
products and pricing pressures due to competitive industry conditions.
Additional factors that may result in different actual results include:
increased prices for leather, which is a world-wide commodity that can not be
passed on to customers for some reason, change in tax rates, change in interest
rates, change in the commercial banking environment, the Company's or its
significant trading partners' inability to identify all Y2K issues, problems
with the importation of products that the Company buys in many countries around
the world, including, but not limited to, transportation problems or changes in
the political climate of the countries involved, including the maintenance by
said countries of Most Favored Nation status with the United States of America,
and other uncertainties, all of which are difficult to predict and many of which
are beyond the control of the Company.
13
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the 1997 Annual Report on Form 10-K, the Company, as
successor-in-interest to National Transfer & Register Corporation ("National"),
has been a defendant in a lawsuit brought in July 1994 by Gary A. Bedini and
John C. Bedini (the "Plaintiffs") in the United States District Court for the
District of Colorado (the "Court"). The Company as part of a reverse merger
transaction with National is contractually indemnified against loss in this case
by one of the additional defendants Securities Transfer Corporation, a Texas
corporation ("STC") and related entities and individuals of STC.
This action was originally tried in July 1995, and upon conclusion of
the trial in September 1995, a Judgment in favor of the plaintiffs and against
the defendants was entered in the approximate amount of $150,000 including pre
judgment interest.
According to the terms of its contractual indemnification, STC has
defended this litigation at its expense. On September 21, 1995, STC filed
Defendants' Motion to Alter or Amend Judgment (the "Motion"). The Plaintiffs
filed a response to this Motion on October 4, 1995, and said Motion remained
pending until September 18, 1998, when the Court finally ruled denying the
post-trial Motions. This action also started a thirty day clock for the filing
of an appeal.
At its meeting on October 7, 1998, the Company's Board of Directors
determined to send formal notice to STC that the Company expected STC to either
pay the Judgment and obtain a release of all parties, or that sufficient sums be
placed in escrow that would satisfy the full Judgment at the conclusion of any
appeal, or that STC procure a bond in an amount sufficient to cover the
Judgments, or that other arrangements be made so that the Plaintiffs would agree
to release the Judgment pending against the Company.
The Company has been informed by STC and counsel that a settlement
agreement has been reached with the Plaintiffs. Pursuant to this agreement, STC
has paid an agreed sum to Plaintiffs in complete settlement of all claims. The
Company expects to receive shortly notice from the Court that the Judgment
pending against the Company has been released.
Item 5. Other Matters
On July 30, 1998, the Company announced that it had reached an
agreement with Evert I. Schlinger, President of the Schlinger Foundation, to
serve as an advisor to the Company in analyzing financing alternatives and
evaluating locations with regard to the Company's expansion plans.
As previously reported, The Schlinger Foundation is the holder of the
Company's $1,000,000 subordinated debt that is partially convertible into common
stock. Pursuant to the terms of the consulting agreement, Mr. Schlinger will
serve in his advisory capacity for eighteen months to be compensated by the
issuance of a warrant to acquire common stock. The warrant agreement provides
for issuance of 200,000 shares of the Company's common stock at the market value
on the date of grant (August 3, 1998) and has a five year term for exercise of
the warrants. Copies of the agreement and warrant are attached as Exhibits 10.1
and 4.13, respectively, to this Form 10-Q.
14
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
A list of exhibits required to be filed as part of this report is set
forth in the Exhibit Index which immediately precedes such exhibits, and is
incorporated herein by reference.
(b) Reports on Form 8-K
-------------------
Form 8-K dated July 20, 1998 reporting a change in the Registrant's
Certifying Accountant was filed on July 24, 1998 and amended by the filing of
Form 8-K/A on August 6, 1998.
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE LEATHER FACTORY, INC.
(Registrant)
Date: November 12, 1998 /s/ Wray Thompson
-----------------
Wray Thompson
Chairman of the Board, President,
and Chief Executive Officer
Date: November 12, 1998 /s/ Anthony C. Morton
---------------------
Anthony C. Morton
Chief Financial Officer,
Treasurer and Director
(Chief Accounting Officer)
15
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Certificate of Incorporation of The Leather Factory, Inc.,
filed as Exhibit 3.1 to the Registration Statement on Form
SB-2 of The Leather Factory, Inc. (Commission File No.
33-81132) filed with the Securities and Exchange Commission on
July 5, 1994, and incorporated by reference herein.
3.2 Bylaws of The Leather Factory, Inc., filed as Exhibit 3.2 to
the Registration Statement on Form SB-2 of The Leather
Factory, Inc. (Commission File No. 33-81132) filed with the
Securities and Exchange Commission on July 5, 1994, and
incorporated by reference herein.
4.1 Loan and Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation, filed as Exhibit 4.1 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.2 Revolving Note (Revolving Credit Loan) dated November 21,
1997, in the principal amount of $7,000,000, payable to the
order of FINOVA Capital Corporation, which matures December 1,
1999 filed as Exhibit 4.2 to the Current Report on Form 8-K of
The Leather Factory, Inc. (Commission File No. 1-12368) filed
with the Securities and Exchange Commission on February 6,
1998, and incorporated by reference herein.
4.3 Term Loan A Note (Term Loan A) dated November 21, 1997, in the
principal amount of $400,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.3 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.4 Term Loan C Note (Term Loan C) dated November 21, 1997, in the
principal amount of $1,500,000, payable to the order of FINOVA
Capital Corporation, which matures December 1, 1999 filed as
Exhibit 4.5 to the Current Report on Form 8-K of The Leather
Factory, Inc. (Commission File No. 1-12368) filed with the
Securities and Exchange Commission on February 6, 1998, and
incorporated by reference herein.
4.5 Subordination Agreement dated November 21, 1997, by and
between FINOVA Capital Corporation, The Schlinger
Foundation, The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Hi-Line
Leather & Manufacturing Company, a California corporation,
and Roberts, Cushman & Company, Inc., a New York corporation
filed as Exhibit 4.6 to the Current Report on Form 8-K of
The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
4.6 Pledge Agreement dated November 21, 1997, by and between
Ronald C. Morgan and Robin L. Morgan and FINOVA Capital
Corporation filed as Exhibit 4.7 to the Current Report on Form
8-K of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.7 Patent Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.8 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
16
<PAGE>
THE LEATHER FACTORY, INC. AND SUBSIDIARIES
EXHIBIT INDEX
(CONTINUED)
Exhibit
Number Description
------- -----------
4.8 Trademark Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.9 to the Current Report
on Form 8-K of The Leather Factory, Inc. (Commission File No.
1-12368) filed with the Securities and Exchange Commission on
February 6, 1998, and incorporated by reference herein.
4.9 Copyright Security Agreement dated November 21, 1997, by and
between The Leather Factory, Inc., a Delaware corporation, The
Leather Factory, Inc., a Texas corporation, The Leather
Factory, Inc., an Arizona corporation, Hi-Line Leather &
Manufacturing Company, a California corporation, Roberts,
Cushman & Company, Inc., a New York corporation, and FINOVA
Capital Corporation filed as Exhibit 4.10 to the Current
Report on Form 8-K of The Leather Factory, Inc. (Commission
File No. 1-12368) filed with the Securities and Exchange
Commission on February 6, 1998, and incorporated by reference
herein.
4.10 Promissory Note (Subordinated Debenture) dated November 14,
1997, in the principal amount of $1,000,000, payable to the
order of The Schlinger Foundation, which matures December 1,
1999 filed as Exhibit 4.11 to the Current Report on Form 8-K
of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on February
6, 1998, and incorporated by reference herein.
4.11 Pledge and Security Agreement dated November 14, 1997, by and
between The Schlinger Foundation and J. Wray Thompson, Sr.
filed as Exhibit 4.12 to the Current Report on Form 8-K of The
Leather Factory, Inc. (Commission File No. 1-12368) filed with
the Securities and Exchange Commission on February 6, 1998,
and incorporated by reference herein.
4.12 Amendment to Loan and Security Agreement dated May 13, 1998,
by and between The Leather Factory, Inc., a Delaware
corporation, The Leather Factory, Inc., a Texas corporation,
The Leather Factory, Inc., an Arizona corporation, Hi-Line
Leather & Manufacturing Company, a California corporation,
Roberts, Cushman & Company, Inc., a New York corporation,
and FINOVA Capital Corporation effective as of March 31,1998
filed as Exhibit 4.15 to the Quarterly Report on Form 10-Q
of The Leather Factory, Inc. (Commission File No. 1-12368)
filed with the Securities and Exchange Commission on May 15,
1998, and incorporated by reference herein.
*4.13 The Leather Factory, Inc. Stock Purchase Warrant for 200,000
shares common stock, $.0024 par value issued to Evert I.
Schlinger dated August 3, 1998 and terminating on August 3,
2003.
*10.1 Letter Agreement for Consulting Services dated July 24, 1998,
by and between The Leather Factory, Inc. and Evert I.
Schlinger.
21.1 Subsidiaries of the Company, filed as Exhibit No. 22.1 to the
1995 Annual Report on Form 10-KSB of The Leather Factory, Inc.
(Commission File No. 1-12368), filed with the Securities and
Exchange Commission on March 28, 1996, and incorporated herein
by reference.
*27.1 Financial Data Schedule
------------
*Filed herewith.
17
<PAGE>
EXHIBIT 4.13
18
NEITHER THIS WARRANT NOR THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE
SECURITIES LAWS, AND NO TRANSFER OR ASSIGNMENT OF THIS WARRANT OR THE SHARES
ISSUABLE UPON ITS EXERCISE MAY BE MADE IN THE ABSENCE OF AN EFFECTIVE
REGISTRATION STATEMENT UNDER SUCH LAWS OR THE AVAILABILITY OF EXEMPTIONS FROM
THE REGISTRATION PROVISIONS THEREOF IN RESPECT OF SUCH TRANSFER OR ASSIGNMENT.
THE LEATHER FACTORY, INC.
STOCK PURCHASE WARRANT
200,000 SHARES COMMON STOCK, $0.0024 PAR VALUE
This is to certify that, for value received, Evert I. Schlinger, his
successors and registered assigns, is entitled upon the due exercise hereof at
any time during the period commencing on August 3, 1998 and terminating at 5:00
P.M., Central Time, on August 3, 2003 to purchase Two Hundred Thousand (200,000)
shares of the $0.0024 par value Common Stock of The Leather Factory, Inc. at a
price per share as specified in Section 2 of this Warrant and to exercise the
other rights, powers and privileges hereinafter provided, all on the terms and
subject to the conditions specified herein.
1. Certain Definitions. Unless the context otherwise requires, the
---------------------
following terms as used in this Warrant incorporated by reference herein shall
have the following meanings:
Common Stock. The Company's $0.0024 par value Common Stock, any stock
-------------
into which such stock shall have been changed or any stock resulting from
reclassification of such stock.
Company. The Leather Factory, Inc., a Delaware corporation, and its
--------
successors and assigns.
Exercise Price. The price specified in Section 2 hereof.
---------------
Holder or Warrant Holder. Evert I. Schlinger, an individual residing in
-------------------------
Santa Ynez, California, and his successors and registered agents of this
Warrant.
2. Exercise Price. The Exercise Price per share shall be $0.4375 for
---------------
each share of Common Stock covered by this Warrant.
3. Exercise. This Warrant may be exercised by the Holder, as to some or
---------
all, but not less than 50,000 shares at any one time of exercise, of the shares
of Common Stock covered hereby, by surrender of this Warrant at the Company's
principal office at 3847 E. Loop 820 South, Fort Worth, Texas 76119, Attn:
Corporate Secretary (or such other address as the Company may advise the
registered Holder hereof by notice given by certified or registered mail), with
the form of election to subscribe attached hereto duly executed and upon tender
of payment to the Company of the Exercise Price for shares so purchased in cash
or by check. Upon the date (the "Exercise Date") of receipt of the foregoing by
the Company, this Warrant shall be deemed to have been exercised and the person
exercising the same to have become a holder of record of shares of Common Stock
(or of the other securities or property to which he, she or it is entitled upon
such exercise) purchased hereunder for all purposes, and certificates for such
shares so purchased shall be delivered to the Holder or his transferee within a
reasonable time (not exceeding fifteen business days), after this Warrant shall
have been exercised as set forth hereinabove. In the event of a partial exercise
of this Warrant as provided in the Section 3, the holder shall be entitled to
the delivery of a new Warrant certificate representing the rights not yet
exercised.
4. Taxes. The issuance of any stock or other certificate upon the
------
exercise of this Warrant shall be made without charge to the registered Holder
hereof for any tax in respect of the issuance of such certificate. The Company
shall not, however, be required to pay any transfer or other similar tax (if
any) that is payable in respect of any transfer involved in the issuance and
delivery of this Warrant or the exercise of the Warrant.
19
<PAGE>
5. Securities Registration Exemptions. By accepting delivery of this
------------------------------------
Warrant, the holder acknowledges and agrees that this Warrant and the shares of
the Common Stock to be issued pursuant to the exercise hereof shall be issued
pursuant to exemptions from the registration requirements of the Securities Act
of 1933, as amended, and applicable state securities laws. Also, the holder
acknowledges, upon exercise of this Warrant, the stock certificates issued
pursuant to that exercise shall bear appropriate restrictive legends and the
shares of Common Stock evidenced by the certificates shall be "restricted
securities" as defined in Securities and Exchange Commission Rule 144 and shall
be subject to the limitations in that rule on the manner and amount of shares
that can be sold during the applicable holding period.
6. Warrant Register. The Company shall at all times while any portion
------------------
of this Warrant remains outstanding and exercisable keep and maintain at its
principal office a register in which the registration, transfer and exchange of
this Warrant shall be provided for. The Company shall not at any time, except
upon the dissolution, liquidation or winding up of the Company, close such
register so as to result in preventing or delaying the exercise or transfer of
this Warrant. If at any time, the Company shall appoint an agent (the "Warrant
Agent") to maintain such register, the Company shall promptly give notice by
certified or registered mail to the registered Holder hereof of the name of such
Warrant Agent and of the place or places at which this Warrant may be presented
for transfer, exchange or exercise.
7. Transfer. Except as otherwise provided herein (including Section 5
---------
hereof), this Warrant and all rights hereunder are transferable by the Holder
hereof in person or by duly authorized attorney on the books of the Company upon
surrender of this Warrant at the principal offices of the Company, together with
the form of transfer authorization attached hereto duly executed. Absent any
such transfer, the Company may deem and treat the registered Holder of this
Warrant at any time as the absolute owner hereof for all purposes and shall not
be affected by any notice to the contrary. Notwithstanding anything herein to
the contrary, this Warrant shall not be transferred so that the holder holds the
right to purchase fewer than Fifty Thousand (50,000) shares of the Company's
Common Stock.
8. Covenants of the Company. The Company covenants and agrees that all
-------------------------
shares which may be issued upon the exercise of the rights represented by this
Warrant will, upon issuance, be fully paid and nonassessable and free from all
taxes, liens and charges with respect to the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue). The
Company further covenants and agrees that during the period within which the
rights represented by this Warrant may be exercised, the Company will at all
times have authorized and reserved a sufficient number of shares of Common Stock
to provide for the exercise in full of the rights represented by this Warrant.
The Company will provide to or make available to, as the case may be, the Holder
of this Warrant the same information, reports and notices as it shall provide
to, or make available to, the holder of its Common Stock.
9. Notices. Any notice required or permitted to be given hereunder
--------
shall be in writing and shall be deemed given upon the earlier of actual receipt
or forty-eight (48) hours after deposit in the United States Postal Service as
certified mail, return receipt requested with postage prepaid. Notice to any
party other than the Holder shall be made to the most recent address maintained
by the Company in its records. Notices to the Company or the Holder shall be
given to the address indicated below:
If to the Company:
The Leather Factory, Inc.
3847 E. Loop 820 South
Fort Worth, Texas 76119
If to the Holder:
Evert I. Schlinger
1944 Edison Street
Santa Ynez, California 93480
20
<PAGE>
Either party may change the address for notices under this Section 9 by giving
written notice thereof to the other party.
10. Lost, Stolen, Mutilated, or Destroyed Warrants. If this Warrant
--------------------------------------------------
shall become lost, stolen, mutilated, or destroyed, the Company shall, on such
terms as to indemnity or otherwise as it may in its discretion impose, issue a
new warrant of like denomination, tenor, and date as the warrant so lost,
stolen, mutilated, or destroyed. Any such new warrant shall constitute an
original contractual obligation of the Company, whether or not the allegedly
lost, stolen, mutilated, or destroyed warrant shall be at any time enforceable
by anyone.
11. Applicable Law. The validity, interpretation, and performance of
---------------
this Warrant shall be governed by the laws of the State of Texas.
12. Successors and Assigns. This Warrant and the rights evidenced
-------------------------
hereby shall inure to the benefit of and be binding upon the successors and
assigns of the Company, the Holder hereof and, the Holder of the shares of
Common Stock issued upon the exercise hereof, and shall be enforceable by any
such Holder.
13. Headings. Headings of the paragraphs in this Warrant are for
---------
convenience and reference only and shall not, for any purpose, be deemed a part
of this Warrant.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
as of this 3rd day of August 1998, by its Chief Financial Officer and attested
by its Assistant Secretary and its corporate seal affixed.
THE LEATHER FACTORY, INC.
By: /s/ Anthony C. Morton
-------------------------------------
Anthony C. Morton
Chief Financial Officer & Treasurer
ATTEST:
/s/ Robin L. Morgan
- -----------------------------------
Assistant Secretary
(CORPORATE SEAL)
21
<PAGE>
EXHIBIT A
[Subscription Form to be Executed upon Exercise of Warrant]
The undersigned, registered holder or assignee of such registered
holder of the within Warrant, hereby (1) subscribed for _____ shares (not less
than 50,000 shares) which the undersigned is entitled to purchase under the
terms of the within Warrant, (2) makes the full cash payment called for by the
Warrant, and (3) directs that the shares issuable upon exercise of said Warrant
be issued as follows:
--------------------------------
(Name)
--------------------------------
(Address)
--------------------------------
(Signature)
Dated:
<PAGE>
EXHIBIT B
[Assignment]
(To be executed by the registered holder to effect a transfer of the within
Warrant)
FOR VALUE RECEIVED ____________________________________ hereby sell,
assign and transfer unto _________________________, of _____________________,
the right to purchase ____ shares (not less than 50,000 shares) evidenced by the
within Warrant, and do hereby irrevocably constitute and appoint
_________________________________ to transfer such right on the books of the
Company, with full power of substitution.
Dated: _________________________.
--------------------------------
Signature
<PAGE>
EXHIBIT 10.1
July 24, 1998
Mr. Evert I. Schlinger
1944 Edison Street
Santa Ynez, CA 93460
Re: Consulting Agreement
Dear Mr. Schlinger:
The Leather Factory, a Delaware corporation (the "Company"), desires to
retain your services during the following eighteen (18) months for the purpose
of (a) assisting the Company in analyzing financing alternatives available to
the Company, and (b) assisting the Company in evaluating locations for the
Company's distribution units in Portland, Oregon and other locations about which
you have personal knowledge. These services will be performed as and when
required by the Company. These services shall be performed by you as an
independent contractor, and you shall not be an employee of the Company. The
Company acknowledges that it shall not require you to render services under this
agreement at such times that prevent you from performing your other business
activities.
As the sole consideration for the services required hereunder, the
Company agrees to execute and deliver a Stock Purchase Warrant (the "Warrant")
in the form attached as Exhibit "A" contemporaneously with your acceptance of
this letter agreement. You represent and warrant to the Company: (a) you have
received copies of the Company's most recent Annual Report including the annual
report on Form 10-K, the Company's Proxy Statement for the annual meeting of
stockholders held May 21, 1998, and the Company's Form 10-Q for the first
quarter of 1998, (b) you have had the opportunity to meet with representatives
of the Company to ask questions and receive information regarding the Company
and its prospects, (c) you are aware that neither the Warrant nor the shares of
the Company's common stock issuable upon exercise of the Warrant will be
registered under the Securities Act of 1933, as amended, or any applicable
securities laws, and transfer of these securities will be limited as stated in
the Warrant, including the limitations on transfer of restricted securities
contained in Rule 144 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended, (d) you are acquiring the Warrant
and any common stock issued upon its exercise for your own account and not with
a view to the distribution thereof, (e) you are capable of evaluating the merits
of this investment and bearing the risks of the investment, and (f) you are not
relying on the Company or any of its officers, directors, or advisors with
respect to determining the federal and state tax consequences of this Consulting
Agreement, the delivery of the Warrant to you, any subsequent exercise of the
Warrant, or the disposition of any common stock acquired upon exercise of the
Warrant.
<PAGE>
Notwithstanding anything herein to the contrary, you agree the (v) you
shall be an independent contractor of the Company and not an employee, (w) you
shall not have the authority to bind the Company in any capacity, (x) you shall
not be entitled to any compensation or other benefits for your services under
this agreement, other than the rights evidenced by the Warrant, (y) you shall be
responsible for the payment of all taxes related to the services to be rendered
and the Company shall not have any obligation to withhold any taxes for which
you may be liable, and (z) you agree that all services to be performed shall be
consistent with the terms hereof.
If the foregoing is acceptable to you, please indicate your acceptance
in the space provided below.
Sincerely yours,
THE LEATHER FACTORY, INC.
By: /s/ Wray Thompson
----------------------------------
Wray Thompson, Chairman, President
and Chief Executive Officer
ACCEPTED:
/s/ Evert I. Schlinger
- ----------------------
Evert I. Schlinger
<TABLE> <S> <C>
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<NAME> The Leather Factory, Inc.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
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